Tax Reform and Charitable Nonprofits

TODAY, Monday, November 27 at 4:00 pm Eastern

The majority in the House and Senate are racing to enact comprehensive tax reform in time to place a bill on the President’s desk by Christmas. The networks of the National Council of Nonprofits are proud to offer a free national webinar TODAY, November 27 from 4:00 to 5:15 pm Eastern. Register and learn what tax reform will mean to your nonprofit and the people you serve. Hear from nationally prominent speakers who are involved in the intricate details of the tax policy proposals, are directly engaged in the policy debates, and can speak to effective advocacy strategies. You will also hear from nonprofit leaders active in the states on a grassroots basis who will provide real-world examples of the impact of the proposals. Most importantly, you’ll get your questions answered and learn what you can do to help improve the legislation on behalf of the people your nonprofit serves.

All Eyes on the Senate for Tax Reform Action

This may be the critical week for federal tax reform as the Senate commences floor debate on a bill approved by the Senate Finance Committee on November 16. As with the House-passed bill, the Senate legislation cuts individual and corporate tax rates, repeals most deductions, and would add about $1.5 trillion to the federal deficit over 10 years. The action begins on Tuesday afternoon when the Budget Committee packages the tax bill with other provisions and sends it to the Senate floor as the Fiscal Year Budget
Reconciliation bill. The Senate will then take up the legislation under an expedited procedure that permits passage by the end of the week with only a bare majority and not the usual 60 votes needed in the Senate to overcome a filibuster.

At present, it is unclear whether the votes are there to pass the Senate bill as half a dozen or more Republican Senators have expressed concerns about multiple provisions. Their votes could depend on how the final bill resolves tax rates for pass-through businesses, the impact of the Senate bill’s repeal of the individual mandate to purchase health insurance under the Affordable Care Act, significant additional federal deficits caused by the tax cuts and likely renewal of dozens of temporary cuts, and more. Negotiations to secure those votes reportedly took place throughout the Thanksgiving recess, but remain
confidential, leading to wide speculation. A growing concern is that Republican leaders in the House and Senate will secretly negotiate a resolution of the differences between the two bills, essentially “pre-conferencing” the legislation before the Senate expresses its will. This means the fate of the anti-Johnson Amendment provision in the House bill or a widely sought amendment to add a universal or non-itemizer deduction to the Senate bill could be decided not by a majority of Senators but by a select few in
Congress and in the Administration.

Budget Office Bombshell: Sequestration Looms

If Congress enacts tax legislation this year that adds $1.5 trillion to the federal budget, the Congressional Budget Office (CBO) would be forced to impose automatic spending cuts to hundreds of federal programs, including cuts of $25 billion to Medicare. That is the ruling of the CBO’s Director Kevin Hall in a letter earlier this month based on the Statutory Pay-As-You-Go law of 2010 (PAYGO). The letter explains that the PAYGO law requires that all new legislation enacted during a term of Congress must not collectively increase estimated deficits. Hall warns, “OMB would be required to issue a sequestration
order within 15 days of the end of the session of Congress to reduce spending in fiscal year 2018 by the resultant total of $136 billion.” Not all programs would be subject to sequestration; the law entirely exempts many large accounts including some low-income programs and social security. (See the full list of programs subject to automatic revocation.) The only ways to avoid the automatic cuts are to enact offsetting spending cuts or tax hikes to fill the gaps, or waive or repeal the PAYGO rules for FY2018. The latter options would require Democratic support in the Senate because the normal procedures that require 60 votes to
avoid filibusters would apply.

Congress’ Long To-Do List for December

The current session of Congress expires in five weeks and the list of must-pass legislation has only grown since September. In the coming weeks, congressional leaders intend to overhaul the tax system, fund the government for the fiscal year that started 10 weeks ago, and address scores of other priorities. Here are some of the unresolved questions that must be crammed into negotiations over year-end legislation: Whether to fund President Trump’s $1.6 billion border wall request. How to deal with the 800,000 “dreamers” who were put in limbo when President Trump announced the end to the Deferred Action for Childhood Arrivals (DACA) program? Will the Children's Health Insurance Program be reauthorized, with
our without spending offsets (see more below)? Whether and how to fund cost-sharing subsidies to lower costs for health insurance? How much to spend on which natural disasters across the country in recent months? Each of these issues and more pit not just party interests but also regional concerns that are likely to create complicated and competing coalitions as Congress works to do its job and recess for the holidays.

Federal FastView

Federal Spending Plan Unresolved: The temporary deal between President Trump and congressional Democratic leaders to fund the government expires on December 8 with no indication that another bipartisan agreement is in the works. In September, the deal extended funding for all federal agencies and raised the federal spending limit (debt ceiling). Congress approved a budget resolution for fiscal year 2018, which started on October 1, setting the total spending limits for the year, but left it up to the House and Senate appropriations committees to determine how that money should be allocated. The House passed an omnibus spending bill
in September, but the Senate Appropriations Committee is only now releasing details on how it would fund all federal departments and agencies. The deadline for resolving all spending decisions is expected to slip a week or more as congressional negotiators try to work out the details.

Children’s Health Funding in Limbo: The bipartisan health insurance program covering nine million children and pregnant women lapsed two months ago with no clear path for restoring funding by Congress. States are now scrambling to fund the program or face cancelling coverage. Five states are expected to run out of money by the end of the year and 27 by the end of the first quarter. The House recently passed a bill along party lines, but Senate Democrats are balking at proposed cuts in the bill to pay for the CHIP extension. A Senate version of the bill, S. 1827, has bipartisan support because it doesn’t have offsets. However, the Senate is focused on tax reform and other measures so action is uncertain. State health officials are still hoping the program will be reauthorized by December 8, the budget deadline.

Net Neutrality Up for Review: The Federal Communications Commission would scrap its 2015 rules mandating net neutrality, potentially setting off a wave of price hikes and limiting internet innovation, if a draft proposal from the FCC Chairman is adopted next month. The current rules prohibit internet service providers from charging customers higher fees for high-quality streaming and other services, curtailing access to websites, or slowing the delivery of content. The issue is not just a battle of corporate titans – AT&T and Verizon vs. Google and Amazon. Rather, many have
expressed concern on behalf of smaller organizations, including nonprofits, that costs, internet access, and streaming services could establish an unfair internet class system.

Census 2020 – Nonprofits, Tell Local Government to Sign Up: Tribal, state, and local governments only have until a December 2017 deadline to register for the Local Update Census Addresses (LUCA) operation and review the U.S. Census Bureau’s residential address list for their jurisdictions for the 2020 Census. Participation in LUCA is a local government’s best opportunity to help “ensure an accurate decennial census count for their communities” and proper allocation across the country of more than $400 billion in funds. All active, functioning governments are
eligible to submit comments, including federally recognized tribes, states, counties, cities, and townships. The deadline to register for most jurisdictions is December 15, but that may be extended for recent disaster-designated areas. See Governing article for more information.

State Spending Increases as Healthcare Costs are Considered

State spending increased 5.3 percent in Fiscal Year 2017, totaling nearly $2 trillion, fueled in large part by paying for rising healthcare costs and one-time measures to fill budget gaps. However, lower-than-expected revenues strained state budgets as Medicaid costs and other factors continued to rise. This was the first year for increased Medicaid contributions for the 31 states that had expanded the health insurance program under the Affordable Care Act (“Obamacare”), requiring them to pay a portion of the costs of expansion (5 percent). Montana addressed the debate on health insurance
during its special session this month to close a $227 million gap in FY2018 by withholding payments to the state employee health plan, but managed to avoid $150 million in cuts for services. Oklahoma likewise is experiencing budget a shortfall, but the Governor recently retained spending for the state department of health, while vetoing other provisions of a spending plan approved in special session.

Political Courage Honored in Ending the Failed Kansas Tax Experiment

Kansas lawmakers struggled for five years dealing with the consequences of the historic tax cut experiment, but it took a supermajority in each chamber to override the veto by the Republican Governor protecting his policy agenda. The Governor’s plan called for cutting individual income taxes by 25 percent and eliminating the income tax for pass-through businesses, based on a theory that the cuts would jump-start the State’s economy relative to neighboring states. The results, instead, were significant revenue losses and spending cuts. Addressing the economic reality and intransigence of the Governor, various Republican
party factions and Democrats worked together to pull the State back from “taking on water,” as one Senator put it. The conservative Senate majority leader, conceding that the tax reform package had gone too far, admitted, “I knew we needed to do something to get Kansas back on sound financial footing.” As a result of their efforts, Kansas Senate Majority Leader Jim Denning and House Minority Leader Jim Ward are 2017 Honorees for the Governing Public Officials of the Year Award.

Year in Review

Charitable Deduction Challenges and Expansion

Whether states consider the charitable giving tax incentive a lifeline to communities or a costly tax expenditure depends on many factors, including a culture of giving, economic vitality, and looming deficits. Many states steadfastly encourage charitable giving through their tax codes, and several this year acted to reinstate or establish new incentives. Legislators in six states (Connecticut, Illinois, Massachusetts, Michigan, Oregon, and Utah) all introduced bills this year that would have provided some tax relief for charitable donations. Illinois enacted an income tax checkoff for certain youth services while
Utah established a non-refundable tax credit for certain projects in an enterprise zone.

Other states continued a troubling trend over the past seven years of taking up proposals to cap or eliminate these giving incentives. Some policymakers in Delaware and Oklahoma this year saw curbing the giving incentive as a means to fill budget deficits, but met strong opposition by champions in the nonprofit sector of both states. The Speaker of the Oklahoma House pulled a bill to impose a $17,000 cap on all itemized deductions, including charitable deductions, in the face of growing opposition of nonprofits. Delaware’s Governor included the repeal of giving incentives as part of broader personal income tax reform, which was defeated by concerted collaboration by nonprofit leaders. Also this year, Arkansas repealed a law that provided sales tax abatements to nonprofits locating or expanding in the state, and New York permanently extended a cap on the deductibility of charitable donations for those with incomes of more than $1 million.

Michigan Nonprofits, Philanthropic Groups Promote Census 2020

Michigan nonprofits and foundations are gearing up for a three-year campaign for accurate counting of all Michiganders in the 2020 Census. The campaign will work to support the count through outreach and other guidance with special focus on hard-to-count groups such as immigrants, minorities, children, and low-income populations. The state is second in the nation for reliance on federal funding with forty-three percent of the state budget coming from the federal government. An accurate count under the Census is essential for reallocation of federal funding as well as representation in Congress, another
concern being addressed by the campaign. “One thing we’ve learned is that nonprofits are trusted in their communities,” said Joan Bowman, external affairs officer with the Michigan Nonprofit Association. She continued, “They have established relationships and speak the community’s language and because of the role nonprofits play, they’re going to be most successful in counting those hard-to-count populations.” The campaign has raised $4 million, which will be distributed via grants to nonprofits supporting field work of the campaign, and is led by the Michigan Nonprofit Association, the Council of Michigan Foundations, and the W.K. Kellogg Foundation.

Government-Nonprofit Contracting Reform Update

State Compliance with Federal Grants Reforms Falls Short

Preliminary findings from the OMB Uniform Guidance Implementation Survey show disappointing, but not particularly surprising, shortcomings. This fall the networks of the National Council of Nonprofits asked charitable nonprofits with government grants and contracts as well as state and county agencies to complete surveys to help gauge how well the federal grants reforms from the Office of Management and Budget are being implemented. The results make clear that there is still a great deal of work to be done to make
the promise of the OMB Uniform Guidance a reality.

Government agencies and nonprofits alike reported in their survey answers that the most frequent change they’ve noted since the implementation of the OMB Uniform Guidance is increased monitoring, a result that runs counter of the reform goal of shifting the focus from compliance to outcomes. Significantly for nonprofits, less than 20 percent of government agencies and nonprofits said they have seen changes in reimbursement for indirect costs. This preliminary finding is of critical concern to nonprofits because the most significant gain in the Uniform Guidance was the mandate that governments at all levels pay nonprofits for some or all of their indirect costs, suggesting that more education at both the government and
nonprofit levels is needed. Further, there is a great deal of inconsistency across government agencies in how they reimburse nonprofits for indirect costs. Even those claiming that they follow the Uniform Guidance do not appear to be interpreting the rules correctly. One common government policy is to pay a nonprofit’s federal indirect cost rate if one exists or the “10 percent de minimis.” However, only nonprofits that have never negotiated a rate with a government agency (not just a federally approved indirect cost rate) are eligible for the de minimis rate.

Tales of Five Advocacy Champions

Speakers on the national webinar on Tax Reform and Charitable Nonprofits and their organizations have proven track records in engaging charitable nonprofits to advocate on behalf of their missions. Here is a sampling of their activities. Register now for the November 27 webinar that begins at 4:00 pm Eastern.

The Baptist Joint Committee for Religious Liberty, an organization of 15 national, state, and regional Baptist bodies in the United States, is the only faith-based organization devoted solely to religious liberty and the institutional separation of church and state. BJC is to be praised for its efforts with Americans United for Separation of Church and State in generating more than 4,200 signatures by individual religious leaders on the Faith Voices letter in support
of keeping houses of worship nonpartisan. As with the Community Letter in Support of Nonpartisanship discussed below, and unlike alleged yet undisclosed individuals promoting the politicizing of churches and nonprofits, the Faith Voices letter fully discloses the names of the people who are willing to take a public stand. The Baptist Joint Committee’s leader, Amanda Tyler, is a respected speaker on the critical issue of preserving the Johnson Amendment, and has published numerous articles in support of the importance of nonpartisanship in houses of worship. She and Tim Delaney of the National Council of Nonprofits wrote, There’s a wolf in sheep’s clothing hiding in the GOP tax bill, which ran in The Hill on November 8.

The North Carolina Center for Nonprofits is the largest state association of nonprofits in the South and has a robust public policy program that takes the debates outside of the Capitol in Raleigh by hosting town hall meetings with policymakers around the state. The NC Center has kept its members informed on the developing tax reform legislation through a weekly policy update, blog postings, an analysis, and comparison chart that explains the North Carolina impact of various tax changes. The Center was one of the first organizations to endorse the Universal Charitable Giving Act, H.R. 2988, introduced by Representative Mark Walker (R-NC).

United Way Worldwide is one of the nation’s largest charitable nonprofits with active operations in every congressional district. In recent weeks, it has mobilized its entire network in an effort to improve the tax reform legislation in the areas of the charitable giving, earned income tax credits, and other issues. A recent call to action encourages local United Way leaders to work to get Senators or their Chiefs of Staff on the phone to deliver key points on behalf of the nonprofit community. The Action Alert reiterates the good advice that board members can be the best advocates. United Way also
has prepared sign-on letters for the individual states and encourages their leaders to reach out to their local media to counter the misleading congressional talking point that “the charitable deduction has been preserved.” Check out their recent examples of media outreach in Bakersfield, CA and Tuscaloosa, AL.

Utah Nonprofits Association takes the challenge to the Johnson Amendment seriously, as have charitable nonprofits and many others in the state. UNA earned the noble distinction of generating the largest number of signers on the Community Letter in Support of Nonpartisanship on a per
capita basis: 217 nonprofits, foundations, and other supporters of the community. The state association achieved this by sending out targeted action alerts, communicating with local media, and keeping the issue before the vibrant nonprofit community in the Beehive State.

IN THIS ISSUE

Federal Issues

Tax Reform Update

Sequestration Returns

Year-End Legislative Priorities

Federal FastView

FY 2018 Appropriations

Children’s Health Insurance

Net Neutrality

Census 2020

State and Local Issues

State Expenses: MT, OK, US

Kansas Tax Experiment: KS

Charitable Giving Incentive: AR, CT, DE, IL, MA, MI, NY, OK, OR, UT

Census 2020: MI

Government-Nonprofit Contracting Reform: US

Advocacy in Action

Worth Reading

In Tax Debate, Gift to Religious Right Could Be Bargaining Chip, Kenneth P. Vogel and Laurie Goodstein, New York Times, November 26, 2017, exposing that the House tax bill change to the Johnson Amendment “could turn churches into a well-funded political force, with donors diverting as much as $1.7 billion each year from traditional political committees to churches and other nonprofit groups that could legally engage in partisan politics for the first time.”

The House tax bill unleashes a dangerous avalanche of campaign cash, Washington Post, November 19, 2017, in which the editorial board of the paper of Woodward and Bernstein blow the whistle on the anti-Johnson Amendment language in the House bill, writing what it “really amounts to is throwing open an entirely new channel for campaign money to politicize churches, charities and foundations.” The editorial concludes: “The churches, charities and foundations already enjoy the right to advocate for issues. There is no need to give these groups a new cash window and make them servants of special
interests seeking to further warp the nation’s electoral politics.”

“The [Johnson Amendment] repeal’s backers say it protects free speech and religious liberty, but these are red herrings. Churches and charities are perfectly free to endorse candidates, they just can’t do it with tax-free money. The government’s bargain with such groups is: We will exempt you from taxes and let you raise tax-deductible contributions, if you stay out of partisan politics. This protects charities from government meddling, and ensures that taxpayers aren’t forced to subsidize endorsements of candidates they oppose.”

“Just as so many Americans have grown weary of lobbyists compromising congressional resolve and their influence thwarting any significant or meaningful lawmaking, I expect to see agenda-setting by these same corporate donors to begin compromising church or religious missions and messages, and threatening our reasons for doing and being, as well.”

- Legal caveat at the end of an August letter signed by 50 pastors in support for Alabama Senatorial candidate Roy Moore. The inclusion of the legal disclaimer proves the point that religious leaders and employees of charitable nonprofits can and do endorse candidates in their personal capacity as authorized by the IRS, a fact denied or ignored by those pushing for repeal of the Johnson Amendment.

On tax reform

"When you're a nonprofit that relies on individual donations and in the dynamic environment of changing government funding, it doesn't make sense to do something that would decrease charitable giving,"

-Renny Fagan, President & CEO of the Colorado Nonprofit Association and Board Chair of the National Council of Nonprofits, quoted in Charities line-up against tax bill, the Grand Junction (CO) Daily Sentinel, November 23, 2017.

“[S]tate budgets are being squeezed despite a steady economic upturn nationally. Economists attribute the shortfalls to a mix of slower sales tax revenues and ill-advised tax cuts in some states combined with a hangover from the recession. The Trump administration has also called for budget cuts that would put more responsibility on the states to provide for their residents. And overhauls to welfare programs such as Medicare and Medicaid could follow if Republicans succeed in cutting taxes”

Nonprofits Anticipate Loss Over GOP’s Tax Plan, Spectrum TV, Austin, TX, November 14, 2017, featuring Tim Delaney of the National Council of Nonprofits explaining the adverse impact on giving to communities caused by the tax plans that would nearly double the standard deduction.

Reconciliation Recommendations of the Senate Committee on Finance, Congressional Budget Office, November 26, 2017, providing charts and analysis of the costs of the Senate tax reform bill, including distributional tables showing that the legislation generates new revenue every year from taxpayers earning less than $30,000 annually.

Number of individuals who would no longer have health insurance as a result of repealing the individual mandate under the Affordable Care Act. The Senate version of tax reform repeals the individual mandate to claim more than $300 billion in revenue that is “spent” elsewhere in the bill. The same report finding the loss of health insurance coverage also predicts that average premiums in the individual insurance market will likely increase by about 10 percent in most years over the next decade.